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There are two kinds of investor in this world. One type pays close attention to the daily (and sometimes hourly) flood of information, looking for a reason (any reason) to jump in or out of the markets. The other kind of investor is in for the long haul, and recognizes that the markets are going to experience dips and turns. If these people are particularly wise, they know that the dips and turns are the best friend of the steady, long-term investor, because as you put money into the markets, as you re-balance your portfolio, you gain a little extra return from the occasional opportunities to buy at bargain prices.

Last week, the investment markets made an unusually sharp turn on the roller coaster, and showed us once again the sometimes-comical fallacy of quick trading. See if you can follow the logic of the events that led to last week’s selloff. Federal Reserve Board Chairman Ben Bernanke and the Federal Open Market Committee issued a statement saying that the U.S. economy is improving faster than the Fed’s economists expected. Therefore (the statement went on to say) if there was continued improvement, the Fed would scale back its QE3 (quantitative easing) program of buying Treasury and mortgage-backed securities on the open market, and ease back on stimulating the economy and keeping interest rates low.

Everybody knows that the Fed will eventually have to phase out its QE3 market interventions, and that this would be based on the strength of the economy, so this announcement should not have stunned the investing public. Nothing in the statement suggested that the Fed had any immediate plans to stop buying altogether; only ease it back as it became less necessary. The statement said that this hypothetical easing might possibly take place as early as this Fall, and only if the unemployment rate falls faster than expected. At the same time, the Fed’s economists issued an economic forecast that was more optimistic than the previous one.

The result? There was panic in the streets–or, at least, on Wall Street, where this bullish economic report seems to have caused the S&P 500 to lose 1.4% of its valueon Wednesday and another 2.5% on Thursday.

In addition–and here’s where it gets a little weird–stocks also fell sharply in Shanghai and across Europe, and oil futures fell dramatically. How, exactly, are these investments impacted by QE3?

The only explanation for last week’s panic selloff is that thousands of media junkie investors must have listened to “we plan to ease back on QE3 when we believe the economy is back on its feet again,” and heard: “the Fed is about to end its QE3 stimulus!”

It’s possible that the investors who sold everything they owned on Wednesday throughFriday will pile back in this week, but it’s just as likely that the panic will feed on itself for a while until sanity is restored. If stocks were valued daily based on pure logic, on the real underlying value of the enterprises they represent, then the trajectory of the markets would be a long smooth upward slope for decades, as businesses, in aggregate, expanded, moved into new markets, and slowly, over time, boosted sales and profits. The roller-coaster effect that we actually experience is created by the emotions of the market participants, who value their stocks at one price on Wednesday, and very different prices on Thursday and Friday.

The long-term investor has to ask: did any individual company in my investment portfolio become suddenly less valuable in two days? Did ALL of their enterprise values in aggregate become less valuable within 48 hours–and at the same time, did Chinese and European stocks and oil also suddenly become less valuable? Phrased this way, the only possible answer is: no. And if that’s your answer, then you have to assume that eventually, people will eventually be willing to pay the real underlying value of the stocks in the market, and the last couple of days will be just one more exciting example of meaningless white noise.

With all that said, it’s prudent to be cautious about going “all in” on this pullback in the market and to perhaps take some hard-earned partial profits on positions you’ve been holding. In our clients’ portfolios, we’ve upped our hedges and taken partial profits on short-term positions, but are still holding the majority of our equities and bonds.

With the action in the markets last week, we officially have the beginnings of a downtrend, but that can be very short-lived in this QE environment, so we remain on our toes. Be sure to consult with your advisor if you’re uncomfortable with your holdings or have trouble sleeping at night because of your positions. Nothing in this message should be construed as investment advice or suggestions to buy or sell any security.

If you have any questions or comments, please don’t hesitate to contact us or post them here. We are a fee-only fiduciary financial planning and investment advisory firm that always puts your interests first.

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The map you see below has been widely circulated among professional investors, and it tells an astonishing story. The circle encloses less than an eighth of the world’s total land mass, but it includes more than half of the world’s population. Within that circle are the world’s two most populous nations: China, with 1.35 billion people and India with 1.22 billion, plus countries that rank 4th in population (Indonesia, with 251 million), 8th (Bangladesh, with 164 million), 10th (Japan, with 127 million), 12th (Philippines, with 106 million), 13th (Vietnam, with 92 million), 20th (Thailand, with 67 million), 25th and 26th (Burma and South Korea, both with around 50 million). Also in the circle: Nepal, Malaysia, North Korea, Taiwan, Sri Lanka, Cambodia, Laos, Mongolia and Bhutan.

Add them up and you have 3.64 billion total citizens, or roughly 51.4% of the world’s people.

The answer is simple. While this circle represents the world’s center of gravity as measured by people, it also surrounds some of the least efficient places to deploy your investment resources. Take China, for example, where the same company’s shares trading on the Hong Kong stock exchange routinely cost two or three times more than shares trading in Shanghai, where Chinese residents buy and sell their stocks. Both shares carry identical claims on assets and profits.

Why the difference? Chinese residents invest through so-called A-shares, which most foreign buyers are forbidden to trade in. The rest of us buy B shares trading in Shanghai or Shenzhen, or H shares traded in Hong Kong, or red chips if the companies are state-owned, or P chips if the Chinese company is incorporated outside of the mainland, or N shares for certain Chinese companies listed on the U.S. trading floors. These other share classes share one thing in common: they trade at higher multiples than the relative bargains offered to Chinese citizens. China has granted several foreign firms and investment groups permission to own limited amounts of A shares, but it’s not easy to know, from the outside, which firms have an inside track.

Another problem with investing in China is transparency–or, more precisely, the lack of it. U.S.-based public companies are required to disclose their financials in great detail, and large accounting firms are required to audit and sign off on the accuracy of those statements. In China, accounting standards run from lax to nonexistent, and the Chinese government can forbid foreign access to the books and records of any company on the theory that this might reveal “state secrets.”

Okay, so what about India? Here again, the government forbids non-Indian investors to buy shares of publicly-traded companies. Only six of the 30 companies listed in the BSE SENSEX index–the Indian equivalent of the S&P 500–allow shares to trade on the U.S. exchanges. A few Indian-focused exchange traded funds are allowed to buy shares.

Indonesia’s stock exchange, meanwhile, could be charitably described as “undeveloped.” Currently, it facilitates trading in just 462 listed companies, which have a combined market value of $462.78 billion–almost exactly the current market capitalization of Apple Computer. Trading activity on the Jakarta stock exchange makes up less than one tenth of one percent of the global investment flow.

Of course, the Japanese stock market is large and robust, but investors in Japanese stocks have been less-than-thrilled by their performance since 1991. The Nikkei 225 Stock Market Index peaked at just under 40,000 22 years ago, and now is worth about 12,500.

There is no question that eventually the people living inside of this interesting circle will start punching their weight in the global economy and provide thriving investment opportunities that will conform to more stringent world standards. For now, a prudent investor will avoid investing by population. You should have some money in the emerging economies and watch closely the new developments in Japan, where the prime minister may be shaking the economy out of a decades-long slump. There may come a time when it will be wise to put more than half of your investments into eastern Asia, but that time hasn’t quite arrived yet.